Political uncertainty, financial crises, and stock market volatility: Evidence from MENA region

• Published date: 01 December 2022
• Author: Dorra Talbi,Hasna Chaibi,Aymen Maoueti
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2783

RESEARCH ARTICLE

Political uncertainty, financial crises, and stock market

volatility: Evidence from MENA region

Dorra Talbi

1,2

| Hasna Chaibi

2,3

| Aymen Maoueti

3

1

Higher School of Economic and Commercial

Sciences Tunis, University of Tunis, Tunis,

Tunisia

2

FCF Laboratory, University of Tunis El Manar,

Tunisia

3

Faculty of Economics and Management of

Tunis, University of Tunis el-Manar, Tunis,

Tunisia

Correspondence

Dorra Talbi, Higher School of Economic and

Commercial Sciences Tunis, University of

Tunis, Tunis, Tunisia.

Email: dorra.talbi@essect.u-tunis.tn

The main objective of this article is to analyze and compare the impact of political

uncertainty and financial crises on stock market volatility in 10 MENA countries over

the period 2005–2018. To test our hypothesis, a variety of GARCH models are used.

The results indicate that political events have more significant effect than financial

crises on stock market volatility, as we detect an increase in market volatility during

political elections and terrorist attacks. The comparative tests employed to identify

the best GARCH model in capturing stock markets volatilities reveal that GARCH/

EGARCH models perform the best in our study. EGARCH model is more suitable dur-

ing unpredictable events while GARCH model work well during predictable events.

Additionally, we found that the reaction of investors is not similar during the three

events studied. In fact, terrorist attacks admit a more significant effect than political

election periods. We observed that the reaction of the stock market during expected

events is not instantaneous, whereas it is instantaneous during unexpected events.

Overall, our findings are of great significance for investors and market regulators in

understanding the role of major events on stock market stability, particularly in

MENA region.

KEYWORDS

financial crisis, GARCH models, information effect theory, MENA region, political uncertainty,

stock market volatility

1|INTRODUCTION

In response to world events, exploring the impact of economic uncer-

tainty on capital market has attracted interest of researchers for decades.

In fact, world economy has experienced several major events that have

contributed to an economic destabilization leading to a highly uncertain

business environment. These events can be classified into two types:

events resulting from political tensions (terrorist attacks, elections, gov-

ernment change, civil wars, revolutions…) and those stemming from eco-

nomic conditions (financial crises). However, the previous literature

proved that the major events that generate a high uncertainty in business

environments have a striking effect on financial markets (Balaji

et al., 2018;Chauetal.,2014; Chaudhry et al., 2018).

Major events signal a potential shift in public policy, which leads

to increasing the risk perceived by all market participants (Bekaert

et al., 2014). In fact, these events represent an important pricing fac-

tor of stock returns (Chau et al., 2014). For instance, a probability of

government change leads economic agents, speculators and all stock

market participants to behave irrationally when making investment

decisions. Similarly, political unrest, like, terrorist attacks, civil wars

and revolutions, generally has effects on the functioning of the stock

and financial markets. Political crises or terrorist acts can lead to a sig-

nificant change in stock prices, and therefore investors became

noticeably risk averse. Indeed, perception of political crises drives

these investors to react negatively on the financial market, and subse-

quently values of financial assets deviate from their real values. For

example, Nikkinen and Vähämaa (2010) discover that following three

terrorist acts: the US terrorist attacks on September 11, 2001, the

Madrid train bombings in 2004, and the London bombings on 2005,

had a significant negative effect on stock market sentiment. According

Received: 19 April 2021 Revised: 28 August 2021 Accepted: 1 October 2021

DOI: 10.1002/pa.2783

J Public Affairs. 2022;22(Suppl. 1):e2783. wileyonlinelibrary.com/journal/pa © 2021 John Wiley & Sons, Ltd 1of14

https://doi.org/10.1002/pa.2783